Last Updated on February 5, 2020
A Solo 401(k) Plan, also known as an Individual 401(k) or Self Directed 401(k) offers a self employed business owner, such as a physician or doctor the ability to use his or her retirement funds to make almost any type of investment, including real estate, tax liens, private businesses, precious metals, and more. You can make any investment without requiring custodian consent, tax-free! In addition, a Solo 401(k) Plan will allow a doctor to make higher contribution limits as well as borrow up to $50,000 for any purpose.
The Solo 401(k) Plan offers a doctor far more retirement, tax, and investment options than a Traditional IRA, SEP, or SIMPLE IRA. It can be a perfect retirement plan for any doctor or physician who operates his or her medical practice as a sole proprietor. This retirement plan offers the same advantages as a Self Directed IRA LLC, but without having to hire a custodian or create an LLC.
How Doctors can Benefit from the Solo 401(k) Plan
The Solo 401(k) plan can be unique for doctors because it is designed explicitly for small, owner only businesses. There are many features of the Solo 401(k) plan that make it appealing and popular among self-employed business owners. Also known as an Individual 401(k) or Self-Directed 401(k), the retirement plan offers a self-employed business owner, such as a physician or doctor the ability to use his or her retirement funds to make almost any type of investment, as long as it is IRS approved.
Compare to Other Plans
With a Solo 401(k) retirement plan, the maximum annual contributions are $56,000 if you’re under 50 and $62,000 if you’re over 50. With a traditional IRA, contributions are only as high as $6,000 (under 50) or $7,000 (0ver 50). With a Solo 401(k), you do not need an IRA custodian and you can open your Solo 401(k) bank account at your local bank. However, with the Self-Directed IRA, you will have a custodian, although this will be a passive custodian.
Additionally, the Solo 401(k) offers a Roth feature – a Self-Directed IRA does not. If you wish to purchase real estate with a Solo 401(k), you will need non-recourse financing. However, it is generally not subject to tax. With a Self-Directed IRA, you will also need non-recourse financing, but it is subject to tax.
As you can see, there are more advantages to establishing a Solo 401(k) over an IRA if you are self-employed.
Solo 401(k) in Action
Joe is a doctor who earns $100,000 a year. Joe is 45 years old and the sole shareholder of an S Corporation called ABC, Inc. Joe is the sole owner and employee of the corporation. Joe wishes to make the maximum amount of tax-deductible contributions. If Joe uses a Traditional IRA he can make a tax-deductible contribution of just $5,000. Whereas, if Joe selects a SEP IRA as the retirement vehicle, he can make a tax-deductible contribution equal to $25,000 (25% of $100,000). However, if Joe establishes a Solo 401(k) Plan, Joe would be able to make a tax-deductible contribution of $36,500. This includes the amount as an employee and the corporation profit sharing contribution equal to 25% of Joe’s compensation.
Thus, it is clear that the Solo 401(k) plan offers a self-employed physician the greatest retirement benefits. In addition, he or she is able to borrow $50,000 or 50% of their account value and use that loan for any purpose while having the ability to invest in real estate and other investments tax-free and without custodian consent. Moreover, the Solo 401(k) Plan account can be opened at any local bank, such as Wells Fargo or Chase. A doctor will be able to roll over his former 401(k) or IRA funds to the new Solo 401(k) Plan tax-free. Only Roth IRA or after-tax 401(k) funds are not permitted to be rolled into a Solo 401(k) Plan.
Get in Touch
You don’t have to be a doctor or a physician to enjoy the benefits of the Solo 401(k) retirement plan. You simply must be self-employed or a small business owner with no full-time employees.
If this is you and you’re interested in learning more about the Solo 401(k) advantage, get in touch with IRA Financial Group directly at 800-472-0646. You can also speak to one of our certified 401(k) specialists by filling out the contact form.
We look forward to assisting you.